Indian-owned British carmaker has no choice but to start production in China. Bill Gleeson reports
CHERY?” queried one puzzled Chinese consumer who had been stopped in a Beijing street by a TV reporter. “If Chery builds the car, I wouldn’t buy it.”
China.Biz was soliciting the views of the man in the street following last weekend’s announcement that China’s fourth largest carmaker, Chery, had signed a joint venture deal with Tata-owned Jaguar Land Rover (JLR) that would see £1bn invested into new manufacturing and research and development facilities at Changshu, near Shanghai.
By 2014, 130,000 Jaguars and Land Rovers, including the Evoque and Freelander models, currently built at Halewood only, will roll off the production lines into Chinese showrooms where they will feed the country’s ravenous appetite for Western luxury brands and where consumers are prepared to pay twice the price the same models fetch in European showrooms. Output is expected to rise to 250,000 by 2020.
The plant will also make new models tailored for the Chinese market, though what this means was not spelled out at the press conference last Sunday.
There will also be an engine plant and the new joint venture company will be called Chery Jaguar Land Rover Automotive Company.
Given JLR’s up-market reputation, it may surprise some to discover that Chery is not a well-regarded brand in its own country. It raises the question why has the owner of one of the most venerable British luxury brands entered into a joint venture with them?
According to Professor Karel Williams, a car industry expert at Manchester Business School, Tata has struck the deal with its new Chinese partner for exactly the same reasons that BMW, Audi and Volkswagen have already struck similar joint venture deals with Chinese partners.
Prof Williams said: “The only way you can get into China is by setting up a joint venture.
“All western majors have engaged in joint ventures with Chinese car companies who are unsuccessful.”
He points to official industry statistics that show 75% of all cars sold in China are Western-owned brands.
“The Chinese market is dominated by imported western cars. The big problem for SAIC, Chery and the rest of the Chinese car industry is how do they climb the ladder of manufacturing with a proper brand when the Westerners are eager to allow them to assemble products but without giving them access to the technological know-how. Their number one aim is to acquire knowledge and, in due course, like the cuckoo, kick the Westerner out while banking profits from assembling western cars.”
The Chinese government requires western firms wishing to sell in China to do so through China-based joint ventures. Import tariffs of 25% help underscore the point.
Notwithstanding the import tariffs, JLR’s brands have sold strongly in China. Sales have increased 80% and 60% in the last two years. China is now JLR’s third- largest market. The boom in sales there has helped turn around the fortunes of the luxury brands, which for years lost billions of pounds for their previous owner Ford. JLR now makes £1.5bn a year in profits and employs 25,000 staff worldwide, including 4,500 at Halewood, where, earlier this year, the carmaker introduced a third production shift.
Prof Williams adds: “There are two car markets in China. Chinese-designed cars are at the bottom of the market and they suffer from problems of scale. And then there are imports of western brands that are sold at margins in China Western companies can only dream of in their home markets.
“JLR is a late-comer to the global industry. It is just increasing output to 250,000 units a year when its German competitors are already making more than 1m cars a year each. To achieve that scale, you have to be a global player.
“It makes sense to assemble cars there and have the main component supply lines in those markets, otherwise you are exposed to exchange rate risks.